The Court held that it may be possible to transfer the management of the derivative suit from the derivative plaintiff to the company for matters related to negotiations and settlement of a derivative suit if it was determined that the company's board of directors do not have a conflict of interest.
The ruling involved a request to approve a settlement agreement reached in the derivative suit filed on behalf of Discount Investments (the "Company") against the then members of the Board of Directors due to damage caused to the Company in its acquisition of a controlling interest in the Ma'ariv newspaper. An out of court mediation proceeding was conducted between the parties, during which a settlement was proposed. The settlement was rejected by the derivative plaintiff. Subsequent to the approval of the derivative suit, the Company's controlling shareholders and board of directors were replaced. After this change, the Company reversed the derivative plaintiff's position and accepted the settlement proposal. The Court approved the settlement.
A derivative suit allows stakeholders to realize rights available to a company in situations where there is a failure of corporate governance created by a potential defendant's ability to influence the decision of the company to file a claim against him. In the matter at hand, the request to file a derivative suit was approved because the Company's directors at the time of the filing of the suit were conflicted. Once a transfer of control was affected in the Company to another controlling shareholder and the defendants were no longer serving as Company directors and were no longer interested parties, there is no longer a concern that a board decision to approve a settlement agreement is tainted by a conflict of interest. The Court held that in this situation it is appropriate to defer to the business judgment of the Company's board of directors regarding whether a settlement is in the best interests of the Company.
The Court noted the concern that its holding could have a "chilling effect" on filing derivative suits. However, in the matter at hand, as the derivative claimant did not formally oppose the Company's approval of the settlement agreement, but instead argued that a higher settlement amount is possible, the Court did not find that approval of the settlement agreement would have a chilling effect on derivative suits. The Court held that the decision of whether it is in the best interest of the Company to settle for the particular amount offered or to continue with the management of the derivative suit is a business decision that should be left to the board of directors of the Company.
In addition, the Court noted that as a rule, negotiations of a possible settlement in a derivative suit must be carried out by the derivative plaintiff and the company is not entitled to conduct negotiations in a way that circumvents the derivative plaintiff without court approval. However, the spectrum of situations in which a court should approve a company request when the court is convinced that the board of directors of the company is not biased is significantly wider than where the board of directors has a conflict of interest. Therefore, in situations where the board of directors does not have a personal interest, management of the derivative claim by the company may be considered not only when where the management of the derivative suit by the derivative claimant "will cause serious and irreversible damage to the Company", but also in other situations
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